Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 2, 2003
The $84.90 price recorded last Thursday on the August live cattle futures contract before it expired at the end of the week sets a new all-time record high for live cattle futures. I believe the earlier high was $84.30. On August 28, the nearby August feeder cattle futures moved up to an all-time high of $97.175. As I have indicated in earlier letters, these new highs are not coming as a surprise to me. We have, for the first time in about 30 years, the prospects (not here yet) of building the beef cow herd and therefore reducing beef supplies available to the consumer market in the presence of increasing demand for beef. Basically, anyone who does not recall or was not analyzing these relationships in the early 1970s has never experienced a time period in which a supply-side cyclical reduction in numbers and availability was trying to boost price with demand growing and boosting price on the consumer side of the price equation at the same time. As I have been saying, and I show the October live cattle contract again this week, just keep the trend lines in place and let both the live cattle and feeder cattle markets run to the upside until we see a close below the trend lines. The patterns on live cattle and feeder cattle futures are similar, and the trend lines are basically hooking price lows that occurred on the same dates.
Keep in mind that when we see a correction back to the downside in these cattle markets, and we will, it is probably not going to be a major correction unless some new shock hits the marketplace. On the October live cattle contract, which is trading this week in the $83 area, a correction is not likely to be bigger than perhaps back down toward the $80 level or possibly even the chart gap around $79.50 on this chart. At that point in time, I think the market will find new buying on these price dips in both live cattle futures and feeder cattle futures. If you are going to practice being a selective hedger and try to be short, for example, only when the price trend is down and buy those positions back when it trends back up, you will have to be fairly nimble. It is hard to be quick enough in these markets to pick up all these little moves, so it is important that you not get caught placing short hedges on correction lows and then sitting and watching those take the opportunities away when the market turns back to the upside. We will see some pressure start on the feeder cattle complex as we move into fall and more cattle start to come in off grass, but the other side of the coin is that we may start seeing some hold back of heifers by that time. The pasture is generally better in some parts of the country, and the prospects for record high prices are still in front of us. Even so, each producer will have to face the dilemma of holding a heifer calf back for herd replacement when she is very valuable on the calf and yearling market today. My general advice in these circumstances is if you are going to build the herd, do so with bred heifers or possibly cow-calf pairs where the cow is already bred back to better genetics. That will help get some cash flow in the short term instead of having to wait too long for cash coming back into the ledgers.
Boxed beef values Tuesday morning for the heavier Choice types are back up to $144, and that is testimony to the strength on the demand side for beef. Some cattle are starting to cross the border again from Canada, and those flows will increase across the next few weeks as permits are issued, and that will be a constraining factor on the cattle market and on hogs. The cash hog market has rallied in the futures complex based on some strength in cattle. The charts in the lean hog market looks better than one might have expected. In the presence of all the uncertainty in this market, I am rather impressed with the October contract which traded as high as $55.275 in Tuesday's session. That is a bit above the high from August 8 at $54.65 where I thought we would see some resistance. I also see this as a relatively complete 50 percent correction of the last down move from the high on July 7 at $59.40 down to the lows at $50.75 that occurred at the end of July. The highs we are seeing across the past few days are almost exactly a 50 percent correction of that last major move down, and I would be very interested in replacing short hedges in this hog complex in the October and possibly in later contracts at the same time. We are almost sure to see some seasonal pressure on the cattle market, and that may be complicated by more numbers coming across the Canadian border. We will certainly see an increase in daily slaughter levels in hogs as we move through September through October and November.
In the grain and oilseed markets, the most significant development I see across the past few weeks as the weather has continued to be an issue is the huge key reversal top that we saw on the November soybean contract on August 26. The contract recorded an outside day, a new contract high at $5.97, and then closed virtually on the low near $5.76. Weather had pushed the market higher coming into the long weekend, but then the rains over the weekend have prompted a substantial decline in prices in Tuesday's session. The close was strong in the November soybeans last Friday at $5.89, and the market has traded as low as $5.69 in Tuesday's session and closed down significantly on the day. Damage was not quite as big in December corn, but in both of these charts I am seeing reasons to be a seller for short hedges and a profit taker on long hedges because I believe the weather drive in this market is probably over after the long weekend rains that were fairly widespread. So, I would look to be short in the soybean market as a producer and look to take hedges on long profits on soybeans, soybean meal, and corn. This December corn contract now looks like it should be sold on any rally back up toward the recent highs in the low $2.40s. If you don't do anything, by all means hook a trend line to the low that occurred before the report day back on August 11 and the low from last week on August 27, and be prepared to do something if we see a close below that trend line. There may be some more upside in this corn market. The world stocks are not hugely bearish, but I would suspect that we are going to see sideways to lower pricing now as we move through September and start into the early harvest period.
In the wheat market, I see topping action on August 18 on both the nearby and the new-crop 2004 wheat charts. We have had opportunities in the Chicago market to sell old-crop wheat on nice rallies if you don't have it hedged in a storage program. I have suggested that, above $3.40, get up to 25 percent forward priced in Chicago on the soft red winder wheat, July 2004 contract. The topping action in Kansas City was even clearer, and we had a one-day island reversal top on the December contract. The market has backed off from above $4.00 back down into the $3.70 area since that point in time. The July Kansas City contract, which made a new contract high on that same day on August 18 reaching the $3.55 level, is now trading around $3.40. I want to get to 25 percent forward priced in this market on hard red winter wheat if you get a chance above $3.50 on the July 2004. I would change that recommendation this week to suggest that you get 25 percent forward priced if this market can trade back up to the $3.48 level again, right at the bottom of a chart gap that was left on August 19.
